Breaking Down the Basics: Growth vs. Value

Of course, you don't necessarily have to just pick one or the other

Jul 1, 2013, 7:00 am EST | By Carla Lake, InvestorPlace Staff

Breaking Down the Basics: Growth vs. Value

As you begin investing and start looking at the ETFs and mutual funds your brokerage offers, you’re probably going to realize that there are so many different kinds of products, it will make your head spin.

Growth. Value. Active. Income. Target.

I don’t know about you, but all of those words sound great to me. I want a portfolio with all of them. However, each means something different when it comes to the fund’s investment style.

With that in mind, let’s take a second to break down growth and value, two simple — and effective — investment styles that are especially potent if you have plenty of time to let your money grow, and hear what a few experts have to say about them.

What Is Value Investing?

Value investors comb the market for stocks that are trading below fair market value — essentially, trying to find bargains. And that doesn’t mean the cheapest stock by dollar. Think of it like going to the grocery store: Tuna steaks would be a bargain at $8 per pound, but that would be a lot for fish sticks.

Now, if you buy and hold a tuna steak, it’s unlikely to appreciate in value, no matter what you paid, but it’s a different story for stocks. Value investors wait to sell until the stock returns to fair value or becomes overpriced. Holding value stocks for the long-term is also a good strategy because you pay less for slow and steady growth … but more on that later.

If you want to get an idea of some top-value stock names, you can take a look at the holdings of value-oriented ETFs or mutual funds. For example, the top three holdings in the iShares S&P 500 Value Index ETF (IVE) are General Electric (GE), Chevron (CVX) and Berkshire Hathaway (BRK.B) — a utility stock, an energy stock and the famously frugal Warren Buffet’s investment holding company.

Not exactly the exciting names like Tesla Motors (TSLA) or Apple (AAPL) that financial media is so rabid about … but sometimes a boring bargain is one of the best ways to get more for your money.

“Value investing is low maintenance, making it something that should appeal to busy young people with better things to do than worry about investments. By compounding your money in a quality fund, you grow richer by stealth — little by little — as your dividends and interest pile up and get reinvested.”

An example that he recommends is FMI Large Cap Fund (FMIHX), with a $1,000 minimum. Have a hundred bucks or more automatically taken out of your checking account every month and put into FMIHC … then watch the compounding process take off.

What Is Growth Investing?

As you can easily find out from a source like Investopedia (a great place for terms of the trade, pun intended), growth investing is choosing stocks that are expected to grow, or appreciate in value, over the long term.

This can mean anything from picking little-known small-cap stocks you think have a chance of making it big, to piggybacking on the growth of consistent performers like Procter & Gamble (PG) or Coca-Cola (KO). Of course, going for individual small-cap stocks can be more risky, especially if you’re new to the game.

When it comes to growth, Louis Navellier, the editor of Blue Chip Growth — a newsletter that has beat the S&P 500 by a margin of 3-to-1 over the last 14 years — is the person to talk to at InvestorPlace. He says:

“Value investing in the manner of Warren Buffett will reward those who find the occasional undervalued company. But growth investing — finding the real power-engine companies pushing the economy forward — is what I have found to be the most potent strategy for making investors rich.”

And in fact, if you have a look at the performance of the S&P versus the iShares Russell 1000 Growth Index Fund (IWF), a fund that tracks the growth companies in the S&P 500, over the past five years IWF has the upper hand by about 2 percentage points.

Best of Both Worlds

Of course, you don’t necessarily have to choose one or the other — and there’s no right answer.

In fact, growth and value are often combined for a “growth at a reasonable price” (GARP) strategy. Essentially, this is buying growth stocks at a bargain — when the overall market is down, or the stock has been pushed down due to a sector downtrend or a bad reaction to an earnings report. These funds can be less volatile than a pure growth fund.

One of the most well-known GARP funds is Fidelity Contrafund (FCNTX), led by all-star manager William Danoff. According to Richard Band, “Contrafund has proved to be the steadier performer in recent years” compared to pure growth funds.

Plus, you can snatch it up at a fairly low expense ratio at 0.74%.

Carla Lake is assistant managing editor of 24/7 Trader. At the time of this writing she was long IWF.